Chinese analysts called Vale's move untimely and unreasonable since market demand for steel products was weak in both China and other parts of the world.

UNTIMELY, UNREASONABLE

China Iron and Steel Association (CISA) announced Thursday that all its members would use domestically-produced iron ore and stop importing iron ore from Vale, saying the company breached an earlier agreement by raising prices for the second time this year.

The announcement came two days after the CISA called an urgent meeting to discuss a response to Vale's price hike. At the meeting, major Chinese steel makers signed supply contracts with domestic mining companies in a bid to replace Brazilian iron ore with "Made- in-China" ore.

Earlier this month, Vale raised the price issue for major Chinese iron ore buyers including Baosteel and Wuhan Iron & Steel, claiming that Chinese steel producers paid about 11 percent less than their European counterparts.

Vale said then it was talking with Asian buyers about an 11 to 11.5 percent price hike.

Chinese clients, however, refused such a proposal after already accepting a 65 percent price increase this February with Vale. As a result, Vale ceased iron ore supply to Chinese clients.

Amid global economic downturn and a slowdown in the Chinese economy, demand for steel products was shrinking and steel prices dropping forcing Chinese steel makers to cut back output. This, in turn, led to a decline in market demand for iron ore, Du said.

"At this point, Vale's supply cut doesn't matter that much to China but it may risk losing the Chinese market altogether if it continues to stick to the price hike," she said.

Statistics showed that the country produced a total of 216 million tons of crude steel in the first half this year, up 9.61 percent from the same period last year. The increase, however, was 9.31 percentage points lower than last year's growth rate. Increase of blast-furnace cast iron also dropped 8.95 percentage points year on year.

In June, China imported 27 million tons of iron ore, down 6.37 percent from a year ago. The figure was also 2.61 percent less than the previous month, according to the General Administration of Customs.

Zhang Junsheng, a foreign trade expert with the Beijing-based University of International Business and Economics, said Vale's decision to increase prices was unreasonable given the previous agreement with Chinese steelmakers.

As the world's largest iron ore producer and exporter, the Rio de Janeiro-based company took up 80 percent of Brazil's iron ore production. Chinese iron and steel enterprises imported 270 million tons of iron ore in the first eight months this year, of which 22 percent came from Brazil.

As the stalemate on prices held, Chinese analysts said a shipment stop was not expected to cause a major impact on the country's steel industry.

"Current decline in domestic demand has helped build up a reserve of iron ore. The current storage could keep steel makers running for at least three months," said Umetal analyst Zhang Ping.

Li Xinchuang, vice director of China Metallurgy Industry Planning Research Institute, maintained that Chinese companies were able to move on without Vale's iron ore. "With 600 million tons of raw iron produced annually, it was possible to replace Brazilian products with domestic supply," he said.

Zhang, of the University of International Business and Economics, said Chinese companies have also begun to explore other overseas resources as alternatives to Brazilian mines.

"Continents such as Australia, Africa and South America are all rich in iron mines," said Zhang. He added that China had started exploring multiple channels for iron ore imports since the 1990s.

"Losing one supplier would not much affect our overall imports."

In August, China Metallurgical Group, one of the country's largest steelmakers, reached an agreement with Russia's leading iron company, Evraz Group, to jointly work on an iron mine project in Australia.

Sinosteel, China's second biggest iron-ore trading company, plans to complete its take over of Australia's Midwest Corp. mid September.

Under current conditions, Vale's latest move is not likely to force Chiese steel makers into signing another price increase agreement this year, according to Umetal's Du Wei.